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Short-term political risk, June 2018

In the framework of its regular review of short-term (ST) political risk classifications, Credendo has upgraded eight countries (Ecuador, Honduras, Kazakhstan, Mongolia, Myanmar, Nigeria, Swaziland and Uzbekistan) and downgraded three countries (Barbados, Cyprus and Guyana)

Barbados: downgrade from 3/7 to 4/7

Since 1975, Barbados has a peg to the USD in place. However, historically low tourism revenues (accounting for about half of its current account receipts), the rebound of oil prices (accounting for roughly a quarter of its import payments) and weak capital inflows are putting pressure on this peg. Furthermore, the new government has discovered undisclosed debt from the previous administration, putting the public debt at an eye-popping 175% of GDP, or the fourth largest debt burden in the world. This debt has largely been financed by the Central Bank of Barbados. This financing is expanding the monetary base, which is weakening the bank's ability to defend its pegged currency and reducing foreign exchange reserves. Indeed, as the government has not been keen on devaluation, foreign exchange reserves have dwindled and are estimated to stand at about 1 month of import cover, a low level. Hence, despite its relatively low short-term external debt, the island has been downgraded to category 4/7 from 3/7.

Ecuador: upgrade from 5/7 to 4/7

As oil prices have rebounded from their low level of 2016, Ecuador´s economic fundamentals have been improving. The country enjoys a relatively low level of external debt (standing at roughly 15% of its current account receipts) while the current account deficit has been narrowing to an estimated -0.1% of GDP in 2018. Furthermore, the commitment of the government to the full dollarisation of the economy mitigates the risk of the rather low and volatile level of international reserves (covering only 1.5 months of import in April 2018). In this context, the country´s short-term political risk has been upgraded to category 4/7 from 5/7.

Kazakhstan: upgrade from 3/7 to 2/7

Amid higher oil prices, current account receipts of the oil exporter are expected to increase this year and the current account deficit to narrow to 1.4% of GDP from 2.9% last year. In this context of improving external liquidity, Credendo has decided to upgrade its short term political risk to category 2/7. This category takes into account the low level of short-term external debt and the adequate but slightly decreasing level of foreign exchange reserves.

Mongolia: upgrade from 5/7 to 4/7

This second upgrade in nine months confirms the positive trend that the country has been enjoying on the back of a supportive global climate. As a commodity-led exporter, rebounded world mineral prices have allowed it to recover rapidly in 2017 after having recorded modest growth in 2015-2016. Expanded coal production and exports, stronger FDI and robust Chinese coal demand have also greatly contributed to support the economy. This is happening under massive international assistance from multilateral and bilateral sources. External liquidity is more comfortable with foreign exchange reserves sharply up 80% since the previous upgrade in last October and covering four months of imports. Their amount has also become sufficient to finance the country’s high external debt service.

Moreover, the short-term debt dropped from nearly 45% to less than 35% of current account receipts between 2016 and 2017. Therefore, improved liquidity indicators justify this extra move to category 5/7.

Nigeria: upgrade from 6/7 to 5/7

Nigeria’s current account displayed a 2% of GDP surplus in 2017 and is expected to move toward equilibrium in 2018 and 2019 as oil prices and production are recovering. Moreover, the inflow of hard currency has further increased thanks to better access to international capital markets as foreign investors flocked toward government securities, leading to a record performance of the Nigerian stock market. As a result, foreign exchange reserves have reached pre-crisis levels again (6 months of import cover in February 2018). The Central Bank has been providing windows for buying foreign exchange since April 2017, which have enhanced the availability of hard currency in the Nigerian market through controlled allocations. Nonetheless, capital controls and Central Bank interventions continue to obstruct transfers. Also import restrictions (41items listed) on a significant number of goods still cause disruptions and supply shortages.

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